Jun 16 The Oil Sands Weekly

Syncrude's return to normal delayed (again) . . .

Suncor Energy has once again pushed back its forecast for Syncrude's return to normal operation, this time estimating mid-July.

The company says light oil shipments have been reduced to 130,000 bbl/day, down from a previous estimate of 140,000 bbl/day.

The Syncrude facility has been crippled since mid-March after a naphtha leak sparked an explosion at the upgrader. The leak originated from a 6-inch carbon steel line on a naphtha hydrotreater recycle circuit. Damage was isolated to an adjacent piperack. Suncor says the outage will not affect its 2017 production guidance.

We're number 2 . . .

In their 2017 Oil Sands Production Outlook, IHS Markit says the Alberta oil sands will be the world's second largest source of supply growth over the next few years, exceeded only by US shale.

The firm points out that production has increased almost 300,000 bbl/day since 2014, despite falling oil prices. Another 500,000 bbl/day is expected to come online from new projects and expansion of existing facilities by 2019. IHS thinks another million bbl/day could come online by 2026.

Unlike US shale, oil sands deposits have an extraordinarily long life, and are not subject to the same decline rates as conventional wells. IHS says innovation will likely be the key to increasing production, reducing costs and lowering carbon intensity.

Canadian energy markets according to CAPP . . .

In their annual Crude Oil Forecast, Markets and Transportation Report, the Canadian Association of Petroleum Producers (CAPP) says it expects oil production to increase from the current 4 million bbl/day to about 5.1 million bbl/day by 2030. That forecast was revised higher from last year's estimate of 4.9 million bbl/day.

CAPP says it sees oil supply growing by 5% over the next 3 years then slowing to a 2% growth rate post-2020. Alberta's oil sands will provide 95% of those additional barrels through the next decade. Production from the oil sands is expected to increase from the current 2.5 million bbl/day to about 3.7 million bbl/day by 2030.

CAPP President Tim McMillan says Canada's pipelines are always at full capacity, calling the country's infrastructure network "a freeway that's always in gridlock." Firing back at reports that suggest there are too many approved pipelines on the books, McMillan says the industry needs the Trans Mountain Expansion, Line 3 Replacement, Keystone XL as well as Energy East, which is still stuck in the regulatory review process.

The Gulf Coast remains the most lucrative untapped market for Alberta's crude. Most of Western Canada's exports are currently headed to the Midwest, which is at capacity for heavy oil. But Gulf Coast refineries can process over 2 million bbl/day of heavy crude, far less than the estimated 350,000 bbl/day currently being supplied.

Capital expenditures in the oil sands are expected to decline to $15 billion this year, down from $17 billion last year and $23 billion in 2015. Spending is still less than half of the $34 billion spent in 2014. CAPP also says that "stringent and costly" government policies and regulations will be a major head-wind to long term growth in Canada's energy sector.

Advice from the Advisory committee . . . .

Current emissions from the oil sands are about 70 Mt/year. Various studies have estimated the province will reach the 100 Mt limit in about 5 years.

If that ceiling is exceeded, the group recommends penalizing companies $200/tonne for emissions above their targets, serving as a huge financial incentive to reduce GHGs. The group also recommends the government begin suspending projects that have yet to start construction.

Co-Chair Dave Collyer says he hopes advancements in technology will mean the 100 Mt ceiling is never reached. Energy Minister Margaret McCuaig-Boyd says the emissions cap is the "best way to encourage innovation and repair the damage to Alberta’s reputation."

By the end of this month, the committee will submit another report on which investments will likely yield the greatest emissions reductions as production grows. The government will then recruit new advisory members, who will focus on "regional land based management and improving environmental performance."

The recommendations are non-binding and now open for feedback from stakeholders.

This week's other Alberta energy news . . .

Jacobs Engineering was awarded the engineering services contract for Keyera's Wapiti Liquids Handling & Gas Processing Facility, located just south of Grande Prairie. Jacobs says the work will be handled out of their Calgary office. Terms of the deal were not disclosed.

The CBC is reporting more layoffs at Alberta Innovates and its subsidiary InnoTech Alberta. The agency had its funding cut by $60 million in the past two years, now $286 million for 634 employees. The CBC reported lavish salaries and expensive dinners in Banff in 2015, prompting the NDP government to review the agency's budget.

Husky Energyis investigation one of its maintenance contractors, Newcart Contracting, after the company allegedly fired three Muslim workers in two separate incidents. The incidents occurred at Husky's Lloydminster Upgrader. The workers have also taken their complaint to the Alberta Human Rights Commission. Husky says it requires all its contractors to comply with the company's workplace diversity policy.

CN Railhas been fined $125,000 after pleading guilty to spilling diesel fuel into the North Saskatchewan River in April 2015. The incident occurred when a malfunctioning separator discharged a mixture of diesel and water into a storm sewer at the company's rail yard in north Edmonton. The company was found guilty of failing to report the incident and failing to confine the spill.

Crew Energy has temporarily suspended production in the Montney area due to slope movement at one of its pipelines near the Wapiti River, about 25 km southwest of Grande Prairie. The pipeline is operated by Alliance Pipeline, who has reduced pressure on the line and declared Force Majeure. Alliance says inspections and repairs are expected to last about 3 to 5 days.

Lexin Resources has dropped its lawsuit against the Alberta Energy Regulator (AER) and now says it plans to cooperate with the AER in its asset sales. The AER forced Lexin into receivership last March after it concluded the company was unable to safely manage its 1,600 well sites. The company's director has agreed to pay $175,000 in fines for non-compliance. Alberta's Orphan Well Association has taken over Lexin's wells in the interim, and will be responsible for the sites until the wells are sold.

Bellatrix Explorationhas sold non-core assets in the Strachan area of Alberta for $34.5 million. The divested assets produce about 1,750 boe/day, weighted 70% gas. The buyer was not disclosed.

Saskatchewan and Manitoba put on notice . . .

The federal Liberals are threatening to withhold funding to Saskatchewan and Manitoba ($62 and $66 million, respectively) if they fail to sign on to the Pan Canadian Framework on Clean Growth and Climate Change by the end of the year, which involves implementing some form of carbon tax.

Saskatchewan Premier Brad Wall says he will never agree to any plans that would put a price on carbon, and has threatened to sue the federal government if they try to impose any such tax on the province. Manitoba has also refused to sign the agreement in hopes of extorting more funding for health care.

The federal government has allocated $2 billion over the next 5 years to each province and territory on a per-capita basis.

This week's notable Canadian pipeline news . . .

TransCanadaannounced plans to spend $2 billion through 2021 to expand its NOVA Gas Transmission network, bringing more gas from Western Canada to key markets across North America. TransCanada says it already has about 3 Bcf/day of additional service contracts. The company plans to file for regulatory approval later this year and begin construction in 2019. The expanded line should be fully operational by the middle of 2021.

The National Energy Board (NEB) will be making changes to its pipeline standards after discovering that both TransCanada and Enbridge were using sub-standard parts. Back in April, the NEB warned against using fittings manufactured by two companies (one Italian and one South Korean), forcing both TransCanada and Enbridge to replace hundreds of fittings. The new standards will be released after consultations are completed later this month.

Kinder Morgan Canada says it has successfully raised $5.5 billion for its Trans Mountain Expansion (TMEP), split $4 billion in revolving credit, $1 billion in contingent credit and $500 million in revolving working capital. Last week, the company floated the idea of issuing bonds to replace its credit facilities. TMEP has an estimated capital cost of $7.4 billion, about $1.2 billion of which has already been spent.

US Oil Sands seeks reprieve from creditor protection . . .

Calgary-based US Oil Sandsis seeking shareholder consent to secure a US$5 million convertible loan from ACMO, its largest shareholder, to complete its PR Spring Project in Utah.

ACMO has agreed to pay US$2.5 million upfront and another US$2.5 million once the plant is operational. The loan will be interest free for 10 years. ACMO also reserves the right to replace the entire board. The company says it has exhausts all other financing options.

US Oil Sands stock (USO) will therefore need to be delisted from the TSX Venture exchange, since the TSX does not allows loans to be paid in equity. Should shareholders reject the deal, the company warns it will need to seek creditor protection.

Start-up of the PR Spring extraction plant was halted a few weeks ago due to a faulty centrifuge. The company says all repairs have been completed and the plant has begun to process oil sands.

We'll always have Paris . . .

EPA head Scott Pruitt briefly attended the session on behalf of the US, despite President Trump's decision to withdraw from the Paris Accord. The remaining group of six called the Paris deal "irreversible, non-negotiable and the only instrument possible to combat climate change."

The final communiqué included a footnote that read: "The United States will continue to engage with key international partners in a manner that is consistent with our domestic priorities, preserving both a strong economy and a healthy environment. Accordingly, we the United States do not join those sections of the communiqué on climate and MDBs, reflecting our recent announcement to withdraw and immediately cease implementation of the Paris Agreement and associated financial commitments."

Pruitt reiterated that the US "has always been a world leader when it comes to environmental stewardship" and thanked the Italians for their hospitality. The EPA head then posed for a group photo, and promptly headed back to the US, allegedly to attend a cabinet meeting.

The Paris Accord requires developed countries to hand over US$100 billion annually "to support climate action in developing countries."

This week's notable US energy news . . .

A Washington State judge has overturned a US$2.4 million fine levied against Tesoro Corp for a 2010 explosion at the company's Anacortes refinery. A heat exchanger corroded by high-temperature hydrogen exploded, fatally injuring seven workers. The state's Department of Labor and Industries concluded that Tesoro failed to properly inspect or test its equipment, but the judge ruled there was insufficient evidence.

GE says it has begun testingrobot "crawlers" to inspect, refineries, pipelines and industrial equipment. Subsidiary Avitas Systems Solutions says aerial drones and robots can inspect remote or dangerous facilities, photograph corrosion damage, monitor temperatures and vibrations and even take gas readings. Avitas head Alex Tepper says the robots are not intended to replace humans, but rather expand their inspection capabilities and lower costs.

Tulsa-based WPX Energy has formed a 50/50 joint-venture with Howard Energy Partners (HEP) to jointly develop oil and gas gathering and processing infrastructure in the Delaware Basin. HEP has partnered with Singapore's sovereign wealth fund (GIC Private Ltd), Alinda Capital Partners and Alberta Investment Management Company (AIMCo). The consortium has agreed to spend US$563 in capital, including a US$300 million upfront payment to WPX. HEP will takeover construction and operate the assets.

Monroe Energy, a subsidiary of Delta Airlines, is involved in a legal scuffle with BP after it terminated a supply contract for allegedly blending lower-valued Texas crude with premium varieties. BP says Monroe agreed to the blending when it signed a 3-year contract in 2014. Monroe accuses BP of trying to boost profits by blending less desirable oil, and terminated the contract a year before its expiry. Monroe owns and operated a 185,000 bbl/day refinery near Philadelphia. BP is seeking US$59 million in damages.

Houston-based H2O Midstreamhas acquired water gathering assets from Encana, located in Howard County, Texas. The company says it has plans to expand water gathering and disposal infrastructure to a capacity of 140,000 bbl/day by 2018. Terms of the deal were not disclosed.

Apple has issued another US$1 billion in green bonds to help fund renewable energy programs at its Apple facilities and in its supply chain. This latest bond issuance is in solidarity with the 194 nations that remain committed to the 2015 Paris Accord. Apple's VP of environment Lisa Jackson says “leadership from the business community is essential to address the threat of climate change and protect our shared planet." The tech-giant has a cash hoard of US$240 billion sitting in offshore accounts to avoid paying US taxes.

World energy markets according to BP (Part 1) . . .

World energy consumption grew at a rate of just 1% in 2016, down from the 10-year average of 1.8%.

Energy consumption in China grew just 1.3% last year, the lowest since 1997-98 but still the largest growth market globally. The decline was blamed on continued weakness of the country's industrial sector.

Crude oil still accounts for one-third of the world's energy supply. After declining from 1999 to 2014, market share has increased since 2015.

World oil consumption is still growing by 1.6 million bbl/day (1.6%), led by 400,000 bbl/day growth in China and 330,000 bbl/day in India.

World oil production grew just 400,000 bbl/day last year, the slowest since 2013. Production out of the Middle East increased by 1.7 million bbl/day (led by Iran, Iraq and Saudi Arabia). Production outside of the Middle East declined 1.4 million bbl/day, led by the US, China and Nigeria.

After 10 years of strong growth, world carbon emissions have flatlined. Some of those declines came from the US, but much was likely attributed to less industrial activity in China. CO₂ emission from energy sources grew just 0.1% last year, the lowest since 1981-83.

World energy markets according to the IEA (Part 2) . . .

The International Energy Association (IEA) released a rather "sobering" Oil Market Report this week. Among this month's key highlights:

Despite weak demand in the first half of the year, growth is expected to improve through the end of 2017, leaving its full year growth forecast unchanged at 1.3 million bbl/day this year, rising to 1.4 million bbl/day in 2018.

Despite a 1.8 million bbl/day production cut from OPEC and Russia, global oil supply is still 1.25 million bbl/day higher than the same time last year, driven mostly by gains in the US.

The IEA expects non-OPEC production to increase 1.5 million bbl/day next year, more than half coming from the US. The agency says their first pass at 2018 numbers makes for "sobering reading for those producers looking to restrain supply" as supply is still outstripping demand despite deep production cuts from OPEC members and Russia.

Commercial stockpiles in OECD countries rose another 18.6 million barrels in April, almost 300 million barrels higher than the 5-year average. The IEA says inventories have "increased by more than the seasonal norm" and are likely to keep rising in the US and China.

The Paris-based agency still thinks oil markets are currently undersupplied, but reduced its Q2/2017 deficit from 700,000 to 500,000 bbl/day.

World energy markets according to OPEC (Part 3) . . .

OPEC revised its forecast for global economic growth slightly higher to 3.4% this year, up from a growth rate of 3.1% last year.

World oil demand is expected to rise by 1.27 million bbl/day this year, slightly lower than last year. Non-OPEC supply is expected to grow by just 840,000 bbl/day this year on lower output from Russia, offsetting gains out of Canada, the US and UK.

Around the world this week . . .

ExxonMobil has made a positive final investment decision on the development of the Liza oil field, location offshore Guyana. Liza is part of the large Starbroek block, which borders Venezuelan waters. Exxon estimates the block has 2.5 billion barrels of oil equivalent. Phase 1 at Liza will produce 120,000 bbl/day at a cost of US$4.4 billion for four subsea drill centres and one FPSO facility. The Starboek field is jointly owned with Hess (30%) and CNOOC (25%).

BP CEO Bob Dudley says he won't think about retirement until he hits 65, which would take him to at least 2020. Dudley has been CEO since 2010 and is the first American to head the UK-major. BP has finally settled all claims related to the Deepwater Horizon disaster, prompting Moody's Investors Services to upgrade BP's credit rating from A2 to A1. Moody's also says BP has exhibited "strong operating performance despite high oil price volatility."

BP also announced a new deal with India's Reliance Industries to develop three deepwater gas fields worth an estimated US$6 billion. The three projects will bring up to 35 million cubic meters of gas production online by 2022. The two firms have also agreed to cooperate on downstream technologies, including "differentiated fuels, mobility and advanced low carbon energy solutions."

A fire that broke out at Pemex's 330,000 bbl/day Antonio Dovalí Jaime Refinery has finally been extinguished after burning for two days. The exact cause of the blaze is still unknown but the incident occurred after heavy rains flooded parts of the refinery, located in Salina Cruz, Oaxaca (Mexico). The company has not provided an estimate on the refinery's restart.

The Norwegian government says it plans to spend US$4.2 billion decommissioning and physically removing up to 20 offshore oil fields over the next 4 years. About 40 to 50 wells per year will need to be plugged and abandoned. Norway's continental shelf currently has about 80 producing fields.

Sweden's largest national pension fund has divested its holdings in ExxonMobil, Gazprom, TransCanada, Westar, Entergy and Southern Corp for lobbying against the Paris Accord, building pipelines and drilling for oil in the Russian Arctic. The company says the UN Paris agreement is now a "norm" in their investment analysis.

WEEKLY ENERGY STATISTICS

US IMPORTS OF CANADIAN CRUDE

million bbl/day  preliminary data by EIA

US OIL INVENTORIES

million bbls  data by EIA

US OIL PROD'N & RIG COUNT

million bbl/day  data by EIA & Baker Hughes

3,121k

-387k ▼ 11.0%BBL/D CDN EXPORTS TO US

9,330k

+12k ▲ 0.1%BBL/D US PROD'N

511.55M

-1.66M ▼ 0.3%BBL US INVENTORIES

747

+6 ▲ 0.8%US RIG COUNT

CHANGE WK/WK

This week's Canadian energy data . . .

According to the latest data from Statistics Canada, the country produced3.84 million bbl/day of crude in March, down about 180,000 bbl/day from the previous month. All of the declines were seen in upgraded bitumen (light sweet crude), attributed to the Syncrude outage that began in mid-March.

Total crude exportsdeclined 65,000 bbl/day to 3.37 million bbl/day while imports dipped slightly to 622,000 bbl/day. Canadian refineries processed 1.77 million bbl/day of Canadian crude, up 74,000 bbl/day from February.

Canada added another 17 oil rigs this week, bringing the total to 91.

Notable USenergy data . . .

North Dakota's Department of Mineral Resources says the state produced 1.05 million bbl/day in April, up 20,000 bbl/day from March. Natural gas production jumped 6% to 1.8 MMcf/day.

Another 68 million barrels of crude went into commercial stockpiles, bringing the utilization rate from 59% last fall to 69% in March of 2017. That's a record high for the US.

Total commercial inventory volumes topped 427 million in March, up from 388 million for the same time last year. More than half of those volumes are held in the Gulf Coast (PADD 3).

Despite an 88% utilization rate at Cushing, the storage facility didn't add any new capacity in the past 6 months. Cushing now holds almost 16% of all commercial crude stockpiles in the US, or roughly 68 million barrels.

Rig counts continue to rise in the US, now up for the 22nd week in a row.

This week's OPEC update . . .

OPEC says its May output rose 336,000 bbl/day to 32.14 million bbl/day on higher output from Libya and Nigeria, both exempted from OPEC's production quotas.

Libya's production is now 830,000 bbl/day but OPEC says that number could rise to 1 million by the end of July.

Saudi Arabia's production fell to 9.88 million bbl/day in May, down from 9.95 million in April.

The IEAreleased similar figures this week, pegging OPEC's May output at a record 32.08 million bbl/day, up 290,000 bbl/day from the previous month. The agency criticized Iraq, Venezuela and the UAE for not meeting up to their quotas and warned that big gains from Libya and Nigeria are "delaying the re-balancing" of oil markets.

The Saudi government says it plans to cut another 600,000 bbl/day in July. Exports will likely fall below the 7 million bbl/day mark, as the Saudis burn more oil for summer air conditioning. State-owned Saudi Aramco has been slashing sales to the US and Europe, preferentially selling crude to Asian customers in a desperate attempt to hold on to its market share.

WEEKLY MARKET SUMMARY

CURRENCIES  WEEKLY CLOSE

Friday close  data by Bank of Canada & ICE

96.87

-0.37 ▼ 0.4%USD INDEX

75.57

+1.24 ▲ 1.7%CDN DOLLAR

2.16%

-0.05 ▼ 2.3%US 10Y Bond

1.52%

+0.10 ▲ 7.0%CDN 10Y Bond

CHANGE WK/WK

This week's notable Canadian economic data . . .

The Bank of Canada hinted Canadian interest rates may actually rise in the relatively near future. The news is somewhat surprising given the Bank's preference for a low dollar to support exports and record personal and mortgage debt levels. Chances of an interest rate hike north of the border are now pegged at 72%, up from just 22% the previous week.

Manufacturing salesrose 1.1% to a record high of $54.4 billion in April. The increase was attributed to a 9% gain in petroleum and coal products. Sales in Alberta rose 3% to $6 billion, the third consecutive monthly increase.

National wealth (excluding financial assets) rose 1.9% in the first quarter to $10.26 billion, driven by price gains in real estate and natural resources. National net worth rose 2.6% to $10.5 billion which works out to $287,000 per Canadian.

Federal government debt to GDP was roughly unchanged at 30.7% at the end of Q1. Provincial government debt to GDP rose slightly to 24.3%.

Statistics Canada's 2016 wage survey found that workers in the natural resources and applied sciences have the highest hourly wage ($33.45) and the highest full-time employment rate (94%). Within that group, petroleum engineers were the best paid, at $62.75 per hour. As a result, Alberta had by far the highest salaries, with the Fort McMurray area ranking first.

This week's notable US economic data . . .

The Feds will also begin unwinding their balance sheet, which currently sits at about US$4.5 trillion. The government will begin selling US$10 billion a month (split US$4 billion in treasuries and US$4 billion in mortgage-backed securities), eventually rising to a maximum of US$50 billion monthly.

OIL PRICES  WEEKLY CLOSE

Friday close, USD/bbl  data by CME Group

47.37

-0.78 ▼ 1.6%BRENT USD/BBL

44.74

-1.09 ▼ 2.4%WTI USD/BBL

41.88

-1.03 ▼ 2.4%CDN LT USD/BBL

34.70

-0.76 ▼ 2.2%WCS USD/BBL

CHANGE WK/WK

OPEC says its Reference Basket (ORB) declined 4.2% in May to an average of $49.20/bbl, dipping below the US$50 mark for the first time since last November. The OPEC Basket is priced about halfway between WTI and Brent (averaging US$48.50 and US$51.40/bbl, respectively for the month).

The light sweet/medium sour spread in Asia continues to narrow as OPEC members focus their production cuts on medium sour blends, limiting the supply.

In the US Gulf Coast, the spread between Light Louisiana Sweet (LLS) versus medium sour Mars fell to about US$3/bbl, the lowest since April 2015. The narrow spread has increased demand for medium/heavy sour streams from Latin America, not only in the Gulf Coast but also in Asia-Pacific refineries.

West Texas Intermediate (WTI) was unable to hold on to US$45/bbl this week, now back to November levels, pre-OPEC deal.

The TSX erased all 2017 gains this week, returning to the levels of last December.

NYSE ENERGY STOCKS  WEEKLY CHANGE

Low crude oil prices are helping to boost refining stocks, including Marathon Petroleum (MPC) and Tesoro Corp (TSO), which both hit 52-week highs on the NYSE this week (although still far from their 2015 highs).